But Who Will Monitor the Monitor?

American Economic Review · 2012 · Volume 102 · Issue 6

Abstract

Suppose that providing incentives for a group of individuals in a strategic context requires a monitor to detect their deviations. What about the monitor's deviations? To address this question, I propose a contract that makes the monitor responsible for monitoring, and thereby provides incentives even when the monitor's observations are not only private, but costly, too. I also characterize exactly when such a contract can provide monitors with the right incentives to perform. In doing so, I emphasize virtual enforcement and suggest its implications for the theory of repeated games. (JEL C78, D23, D82, D86)

Keywords

Bargaining Theory, Matching Theory, Organizational Behavior, Transaction Costs, Property Rights, Asymmetric and Private Information, Mechanism Design, Economics of Contract: Theory

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